McDonald’s Corporation — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report; the supplied text does not provide a separate fourth-quarter income statement or results summary.
Business context
McDonald’s franchises and operates restaurants in 119 countries. At year-end, 36,521 of 39,198 restaurants were franchised (93%). The company earns revenue from company-operated restaurant sales and franchise rent, royalties, fees and other sources. Its reported segments are the U.S., International Operated Markets, and International Developmental Licensed Markets & Corporate.
Financial performance and position
| Metric | 2020 | Change versus 2019 |
|---|---|---|
| Total revenue | $19.21 billion | Down 10% |
| Operating income | $7.32 billion | Down 19% |
| Operating margin | 38.1% | 42.5% in 2019 |
| Net income | $4.73 billion | Down 21% |
| Diluted EPS | $6.31 | Down 20% |
| Cash provided by operations | $6.27 billion | Down 23% |
| Capital expenditures | $1.64 billion | Down 31% |
| Free cash flow | $4.62 billion | Down 19% |
Global comparable sales fell 7.7%; Systemwide sales fell 7%. U.S. comparable sales rose 0.4%, while International Operated Markets fell 15.0% and International Developmental Licensed Markets & Corporate fell 10.5%. Total restaurant margins declined 13% to $9.68 billion. The filing reports no separate gross-margin measure.
At year-end, cash and equivalents were $3.45 billion, versus $0.90 billion in 2019. Total debt was $37.44 billion, up from $34.18 billion; shareholders’ equity was a deficit of $7.82 billion. Current assets were $6.24 billion and current liabilities $6.18 billion. The company had $4.5 billion of committed credit lines available. After-tax return on invested capital declined to 14.9% from 19.2%.
Franchisees’ rent and royalty collections were deferred by approximately $1 billion; the company had collected over 80% by year-end and expected the remainder in the first half of 2021. The company also deferred about $490 million of rental income collections that had been recognized in 2020.
Material changes and unusual items
- COVID-19 restrictions, temporary closures and limited dine-in capacity drove weaker international sales and earnings. Operating income excluding specified strategic items fell 23%.
- Reported 2020 operating income included $268 million of net strategic gains, primarily from selling approximately 6% of McDonald’s Japan. The 2019 comparison included $74 million of net strategic charges.
- Company support for franchisee marketing exceeded $200 million; SG&A also included a $100 million commitment to Ronald McDonald House Charities and one-time brand communication and technology investments.
- The company suspended open-market share repurchases in early March. It repurchased $874 million of shares in 2020, versus approximately $5.0 billion in 2019, and paid $3.75 billion in dividends.
- The company opened 977 restaurants and closed 643 in 2020. Closures included approximately 200 in the U.S., many at Walmart locations.
Outlook, management commentary and risks
For 2021, management expected constant-currency Systemwide sales growth in the low double digits, with net unit expansion contributing about 1%; operating margin in the low-to-mid 40% range; capital expenditures of approximately $2.3 billion; more than 1,300 global openings and about 650 net restaurant additions; and free-cash-flow conversion above 90%. Management expected to reduce debt toward pre-COVID-19 leverage ratios. These are forward-looking expectations, not guarantees.
The Accelerating the Arches strategy prioritizes marketing, core menu categories, and digital, delivery and drive-thru channels. Management expected elements of its MyMcDonald’s digital platform in six major markets by year-end 2021 and planned a U.S. loyalty launch later that year.
Key risks include continued pandemic effects and government restrictions; franchisee financial health and ability to invest; execution and returns on digital, delivery and modernization initiatives; labor availability and costs; competition and changing consumer preferences; supply-chain and commodity disruptions; cybersecurity and privacy; currency and interest-rate exposure; environmental and regulatory developments; and litigation and tax uncertainty. The company disclosed $1.48 billion of gross unrecognized tax benefits, including unresolved transfer-pricing matters; resolution could affect future tax results. It stated that pending litigation was not expected to have a material adverse effect, while noting that unfavorable rulings remain possible.
Important facts for investors to verify
- Whether pandemic-related operating restrictions and sales recovery matched the assumptions underlying 2021 guidance.
- Collection of remaining deferred franchise rent and royalties, and the continued credit quality and investment capacity of franchisees.
- Debt maturities, planned debt reduction, access to committed credit and the implications of negative shareholders’ equity.
- Delivery and digital initiative economics, including customer adoption, profitability and required investment.
- Developments in IRS transfer-pricing disputes and other tax audits, as well as potential litigation outcomes.
- Progress against restaurant opening, closure, modernization, margin and free-cash-flow targets.